The Central Bank (BC) confirmed that it will begin reducing interest rates at the next meeting of the Monetary Policy Committee (Copom), in March. However, the authority did not indicate the magnitude of the cut and clarified that interest rates will remain at restrictive levels.
The information is in the minutes of last week’s Copom meeting, released this Tuesday (3). At the time, the board maintained the Selic rate, basic interest rate of the economyat 15% per year, for the fifth time in a row.
“In an environment of lower inflation and transmission of monetary policy [impacto da Selic para queda da inflação] more evident, the strategy involves calibrating the interest level. The Committee expects, if the expected scenario is confirmed, to begin easing monetary policy at its next meeting, but reinforces that it will maintain the appropriate restriction to ensure the convergence of inflation to the target”, say the minutes.
“The commitment to the target imposes serenity regarding the pace and magnitude of the cycle, which will depend on the evolution of factors that allow greater confidence in achieving the inflation target in the relevant horizon for the conduct of monetary policy”, stated the BC.
Defined by the National Monetary Council (CMN), the target is 3%, with a tolerance range of 1.5 percentage points up or down. In other words, the lower limit is 1.5%, and the upper limit is 4.5%. For this year, the financial market forecast for the Broad National Consumer Price Index (IPCA) – official reference for inflation in the country – it is at 3.99%, that is, within the target.
The Selic rate is at its highest level since July 2006, when it was 15.25% per year. Selic is the BC’s main instrument for achieving the inflation target. When Copom increases the Selic, the purpose is to contain heated demand; This has an impact on prices because higher interest rates make credit more expensive and encourage savings. But higher rates can also make it harder for the economy to expand.
“The current scenario, marked by high uncertainty, requires caution in the conduct of monetary policy. The Committee assesses that the current strategy has proven to be adequate to ensure the convergence of inflation to the target”, say the minutes.
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Resilience
According to the authority, the maintenance of interest rates still at restrictive levels is due to the resilience of some factors that put pressure on prices “both current and expected”, in particular the dynamism still observed in the labor market. Even so, the BC adds that domestic economic activity maintained a moderate growth trajectory, operating above its expansion potential without putting pressure on inflation.
“In the most recent period, the unemployment rate has remained at historically low levels while average real incomes have maintained an upward trend above labor productivity growth. The Committee remains attentive to the debate on the current and structural dimensions of the labor market, emphasizing the need for this analysis to assess transmission patterns from employment levels to labor income and, finally, to prices in the various sectors of the economy”, the minutes say.
“The moderation and heterogeneity of growth trajectories between different sectors and markets are compatible with the current monetary policy. Markets that are more sensitive to financial conditions show greater deceleration, while markets that are more sensitive to income show greater resilience”, explained the BC.
For the financial market, according to the latest edition of the Focus newsletterthe Selic should be reduced to 14.5% per year at the next Copom meeting, in March, and reach 12.25% per year by the end of 2026.
Scenarios
For the BC, the external environment still remains uncertain due to the situation and economic policy in the United States, with repercussions on global financial conditions. “Such a scenario requires caution on the part of emerging countries in an environment marked by geopolitical tension”, says the minutes.
Regarding the domestic environment, the Copom minutes state that the health of public accounts is also a determining factor in the success of controlling inflation. According to the BC, fiscal policy not only stimulates demand in the short term, but also shapes investor confidence in the sustainability of Brazilian debt.
The Copom emphasized that a countercyclical fiscal policy — one that helps balance the economy in times of euphoria or downturn — is essential to reduce the “risk premium”. When the market perceives uncertainty about the payment of public debt, it demands higher interest rates to lend money to the country.
“The Committee reinforced the view that the weakening of the effort towards structural reforms and fiscal discipline, the increase in targeted credit and the uncertainties about the stabilization of public debt have the potential to increase the economy’s neutral interest rate, with deleterious impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity. The Committee maintained the firm conviction that policies must be predictable, credible and countercyclical”, the minutes say.
